BARCLAYS BANK PLC,MUMBAI vs. ADDL DIT (IT) 3, MUMBAI

178/M/11; I.T.A./4030/Mum/2014; I.T.A./584/Mum/2011 & I.T.A./4235/Mum/2014— M/s. Barclays Bank PLC. AY-06-07 & 07-08 4.GOA-3 is about applying an ad hoc rate of 20% for agency fee and interest income of the overseas branches for the External Commercial Borrowings(ECB).It is one of the issues dealt with by the TPO. 4.1.During the TP proceedings,the TPO found that the assessee was engaged in the business of structuring of asset liability, risk management services, underwriting for domestic rupees/debt instruments in India through the investment banking businesses stream of its India branches, that it had coordinated activities for ECB’s raised by Indian companies from its overseas branches. After considering the explanation of the assessee in that regard,the TPO held that it had played an active role in ECB deals, that it was engaged in provision of substantial support service to its AE in connection with the ECB’s. He made an adjustment of Rs. 1.25 crores based on revenue split method,applying the rate of 25%. The AO, accordingly,passed the final order making an addition of Rs. 1,25,18,349/- to the total income of the assessee. 4.2.Aggrieved by the order of the AO, the assessee preferred an appeal before the FAA and made detailed submissions. After considering the order of the AO/TPO and the submissions of the assessee,he held the assessee played its role in ECB’s granted by its foreign branches to the Indian borrowers,that the TPO/AO had rightly held that overseas branches were helpedd by it for documentation, collecting fees,ensuring smooth and timely payment of interest, credit review, monitoring of credit facilities,analysis of financial statements of the Indian borrowers, monitoring of breach of covenants,monitoring of assets, coordination with other banks,lenders to the clients under syndication and preparation of watch list report, that the above-mentioned services were rendered to the AE’s, that the services had to be compensated at arm’s length, that the TPO had applied the PSM and had fixed the rate at 25% on the basis that other foreign banks were charging the AE’s at the rate of 25%, that the percentage adopted by him could not be taken as yardstick, that other foreign banks were dealing with their AE’s, that prices adopted by them could not be considered for fixing the ALP. Referring to the orders of his predecessors for the earlier assessment years,he held that the rate should be fixed at 20% of the interest and the commission as attributable to the assessee’s branch in India,that the entire risk on credit (ECB) was borne by the foreign banks. 4.3.Before us,the AR contended that the TPO had concluded that uncontrolled transactions were not available, that the cup method using uncontrolled transactions could not be applied, that he erred in not providing the details of controlled transactions considered as comparables and the 178/M/11; I.T.A./4030/Mum/2014; I.T.A./584/Mum/2011 & I.T.A./4235/Mum/2014— M/s. Barclays Bank PLC. AY-06-07 & 07-08 analysis undertaken in terms of comparability of functions performed risks assumed and the assets utilised with respect to the alleged comparable transactions vis-à-vis the assessee’s functions,assets and risks, that the use of secret comparable made the TP process infructuous.The AR further stated that the assessee was not required to deduct tax at source,that the FAA was not justified in considering interest portion for calculating the disallowance.He relied upon the case of M/s.Credit Lyonnais (ITA/1935/Mum/2007) and M/s. Credit Lyonnais(IT Appeal 1781 of 2014 of the Hon’ble Bombay High Court)The Departmental Representative (DR)supported the order of the FAA. 4.4.We have heard the rival submissions and perused the material before us.We find that the assessee was playing a very limited role in the sequence of activities of sanctioning of loan by the AE.s to the Indian customers.The contribution on part of the assessee was limited to establish -ing initial contact with Indian entities and acting as a liaison between the AE and the customer. It is a fact that loan was granted by the AE.s and all the gains and risks of the transaction was with them only.The assessee was compensated by the AE.s for the job done by it.As far as interest income is concerned,it is clear that there was no contract /agreement between the assessee and the AE.s to share the interest amount.The assesse is objecting to the adjustment made under the head interest income.It has no objection with regard to the other portion of the adjustment.So,we direct the TPO/AO that only 20% of the agency fee should be attributed to the assessee and the interest attributed to its income should be deleted. Here,we would like to refer to the case of M/s Credit Lyonnais (supra), wherein identical issue has been discussed as follows: "8.8 Having held that para 4 of the Protocol does not apply to the case of the assessee, now, the question arises as to whether the adjustment made by the authorities below is justified. For making the adjustment, the authorities below have taken into consideration, the income towards interest as •well as the fee charged by the foreign branch from the clients. It is pertinent to note that when the loan is provided by the syndicate and the assessee has not contributed to the loan amount then as regards the income of interest, the same cannot be attributed to the ussessee for providing the services of the financial analysis of the borrowers, market condition and regulatory environment in India. Since the assessee has provided certain services for that arms length charges can be determined as per the provisions of transfer pricing regulation. The TPO as well as CIT(A) has not brought out any comparable for determination of the arms length price but look the total income comprising interest as well as other fees charged by the foreign branches for allocation/attribution to the assessee. In this case, the ALP has not been determined by taking into consideration uncontrolled similar transaction. In our view, the interest cannot be taken info account for attribution of income towards service charges/fees and, therefore, in the facts and circumstances of the case only the fee charsed by the foreign branches can be taken into consideration for making adjustment under transfer pricing provisions. " * 5 178/M/11; I.T.A./4030/Mum/2014; I.T.A./584/Mum/2011 & I.T.A./4235/Mum/2014— M/s. Barclays Bank PLC. AY-06-07 & 07-08 The above decision of the Tribunal was upheld by the Hon'ble Bombay High Court in of 2014.Considering the aforesaid facts,Ground no.3 is decided in favour of the assessee, in part. ITA/584/Mum/2011,AY.2006-07: 5.Solitary ground of appeal,raised by the AO,deals with derivative transactions and their ALP. During the TP proceedings,the TPO observed that Barclays Capital, a division of Barclays bank, would manage the global derivatives operations,that it included foreign exchange, interest rate, equity and commodity and credit derivatives,that the three principal locations of its operations were London, New York,Tokyo with approximately 50 other operations of different business profiles all around the world, including India, that each of the principal trading locations together from the global derivative business of Barclays, that the business was divided by currencies and further subdivided by products, that in view of variety of factors the deal was entered directly by overseas entity with the customers,that employees of Barclays India branch had a primary relationship with the Indian customers,that they would assist the overseas Barclays entity in getting derivative business,that Barclays India branch would get compensated for its market effort.He found that in accordance with the Global TP Policy(GTPP) of Barclays the Indian entity was being compensated at around 24.40% of the Initial Net Present Value (INPV) in respect of the marketing support it provided to its overseas AE.s,that it had stated that no internal uncontrolled comparable transaction was available for determining the ALP of the services rendered by it. The TPO called for further details in that regard.After considering the same, he held that the primary onus of benchmarking the transaction of marketing of derivative products,by citing uncontrolled comparables,was on the assessee,that it had not discharged its primary onus,that it had only furnished the GTPP with respect to marketing of derivative products,that the derivative products were very unique financial products dealt by the branches of selected few foreign banks,that those products were not dealt by any Indian company, that the data of such services providers were not available in the public domain, that the external comparable selected by the assessee to benchmark the transaction using TNMM was not as per the provisions of the Act,that the comparables were dealing in financial and leasing business or were in business of consultancy services,that none of them were dealing in the marketing of derivative products,that it had failed to do the FAR analysis of the comparables.He rejected the external comparable selected by the assessee.He further held that margin shown by the other 6 178/M/11; I.T.A./4030/Mum/2014; I.T.A./584/Mum/2011 & I.T.A./4235/Mum/2014— M/s. Barclays Bank PLC. AY-06-07 & 07-08 branches of foreign banks operating in India were showing 60% of INPV as arm’s length compe -nsation on marketing of derivative products.Referring to the Rule 10B (2)(d)of the Income Tax Rules,1962(Rules),he held that the Rule was about uncontrolled transactions,that the spirit remained the same,that the bank’s contention to give preference to its GTPP over the external controlled comparables had to be rejected,that functions carried out by the assessee with respect to marketing of derivative products were primarily to manage relationship with existing clients and establish and develop relationship with new clients,that some of the Indian branches of foreign banks were showing compensation at the rate of 60%, that JP Morgan Chase Bank and Bank of America were also primarily involved in providing origination support and coordination between the AEs and the Indian customers for concluding such deals,that to that extent the functions carried out by the assessee and those carried out by other branches of foreign banks operating in India were the same,that the manner of a location of compensation to the assessee was not based on country specific efforts.He rejected the TNMM adopted by the assessee and applied Profit Split Method(PSM) for benchmarking the ALP of the IT.s.Finally, he adopted arm’s length compensation at the rate of 60% on INPV for the purpose of benchmarking the IT.s of the assessee.He proposed an upward adjustment of Rs.51,23,17,545/-.

5.1.Before FAA,during the appellate proceedings,the assessee made elaborate submissions. After considering the available material, he held that the assessee was coordinating with the foreign branches that offer the desired derivatives to Indian customers,that for the services rendered, the Indian branch of the assessee was compensated by the overseas branches at 24.40 percent (approximately) of the INPV,that the Indian branch had charged the foreign branches on the basis of the GTPP,that the average cost plus margin considered by the assessee was far better than the average of cost plus margin of comparables,that the TPO had not accepted the TP study made by the assessee,that he fixed the ALP on the basis of a foreign bank in India which charged @ 60 percent of the INPV for the derivative product,that he was not justified in comparing the two entities.Finally,he allowed the appeal filed by the assessee.

5.2.Before us,the DR argued that in absence of uncontrolled data it was permissible to use controlled data for determining ALP of IT.s,that the method used by the TPO i.e.PSM was better than the method used by the assessee,that the assessee had not conducted any FAR analysis,that the matter could be remanded to the TPO for carrying out fresh benchmarking,that the matter 178/M/11; I.T.A./4030/Mum/2014; I.T.A./584/Mum/2011 & I.T.A./4235/Mum/2014— M/s. Barclays Bank PLC. AY-06-07 & 07-08 could be restored back to the file of the TPO if it was found that he had not followed the prescribed method. The AR supported the order of the FAA and stated that the assessee had carried out TP study,that it had rightly applied TNMM,that it was following global policy for determining ALP of derivative transactions,that no defect in the policy adopted by it was pointed out by the TPO,that comparable rate fixed by the AO at 60% was without any basis,that the TPO had considered transaction between branch in India and the foreign head office as comparables for making TP adjustment.He relied upon the cases Technimont ICB(P.)Ltd.(138ITD23), JP Morgan India Pvt. Ltd.(ITA/8193/Mum/2010),Johnson and Johnson Ltd.(247taxman 136). 5.3.We have heard the rival submissions and perused the material before us.We find that one of the divisions of the assessee i.e. Barclays Capital would handle the global derivative operations, that same included foreign exchange,interest rate, equity, commodity and credit derivatives, that the activities of the assessee were limited to marketing activities,that the AE.s were concluding the sale-transaction,that for the year under consideration the assessee was compensated at the rate of 24%(approximately)of the estimated day-1profit/loss from the said deals in accordance with the GTPP of the group,that the TPO had rejected the TNMM applied by the assessee and had used PSM for benchmarking the transaction of marketing of derivative products,that he concluded that risk relating to the derivative business remained partly in India and partly outside India and that the key assets in derivative were its people,that one of the foreign bank branch was being compensated at the rate of 60% for the same derivative business, that he made an addition of Rs.51.12 crores,that the FAA granted relief to the assessee.We find that the TPO had accepted,in principle,that the functional role of the assessee was limited to rendering the marketing services to overseas branches,that rest of the activities were handled by the AE.s.The derivative transaction does not end with marketing.It is a complex process.So,the AE would compensate the assessee for the services rendered to it.There would always be a relation between the compensation paid and availed services.The assessee had adopted the GTPP to determine ALP of the IT.s.In our opinion, there was no defect in its approach.On the other hand,method applied by the TPO and the details of controlled transactions,relied upon by him,were not available in the public domain. The assessee did not have any opportunity to examine the comparability of FAR of the transactions selected by the TPO. In our opinion,use of untested comparables to determine the ALP is against the basic spirit of the TP provisions and the Rule 10 178/M/11; I.T.A./4030/Mum/2014; I.T.A./584/Mum/2011 & I.T.A./4235/Mum/2014— M/s. Barclays Bank PLC. AY-06-07 & 07-08 of the Rules The TPO had also violated the principles of natural Justice by not confronting the assessee with the comparables used against it. He proposed an addition of Rs. 51.12 crores to the income of the assessee without affording an opportunity to it,so that it could become aware of the basis for the adjustment.Only on this count the adjustment could be validly deleted. 5.4.But,we would like decide the issue on merits also.It is found that the assessee had followed GTPP for TP purposes,that as per the global policy the Indian branches-rendering the services and arranging for the sales of the derivative products for its customers from its foreign branches- were to get at 24.40 percent of the INPV.The Appellant had carried out a TP study and had applied TNMM for determining the ALP.We find that the average cost plus margin of the uncontrolled comparables was 19% and in the assessee’s case,cost plus margin was 424%. If we look at these figures,it becomes clear that compensation received by the assessee from its AE for derivative deal was at arm’s length.INPV of a derivative transaction is calibrated based on projection of expected cash flow on a derivative transaction and applying appropriate discounting factor.INPV calculation can be different for different banks because of their functioning.So,in our opinion it would be inappropriate to apply for a uniform multiplier effect on the value of sales credit/INPV of derivative transactions.In other words,the INPV fixed by Indian branch of another foreign bank in India should not have been compared with the assessee case,because the above said branch of the foreign bank itself was dealing with its another AE.In short,we hold that the methodology adopted by the TPO,for determining the ALP of INPV of the derivative transactions,was incorrect from the very beginning and was fundamentally wrong.We would like to refer to the case of Technimont ICB(P.)Ltd.(supra) and it reads as under: "14. What is an 'uncontrolled transaction' has been clearly defined under Rule 10A(a) to mean 'a transaction between enterprises other than associated enterprises whether resident or non- resident'. A plain reading of the meaning given to the expression 'uncontrolled transaction1 leaves no room for any doubt that it is a transaction between two non-associated enterprises. If the transaction is between two associated enterprises, it goes out of the ambit of' uncontrolled transaction' under Rule 10A.When section 92C is read along with Rules 10B(e), and 10A, it becomes abundantly clear that in computing ALP under the transaclional net margin method, a comparison of the assessee's net profit margin from international transactions with its AEs has necessarily to be made with that of the net pro fit margin realized by the same enterprise or an unrelated enterprise from a comparable but definitely uncontrolled transaction i.e., a transaction between non-associated enterprises. There is no statutory sanction for roping in a comparable controlled transaction for the purposes of benchmarking. When it has been clearly mandated in all the relevant methods for determining ALP that the comparison has to be made by the enterprise's international transaction with comparable uncontrolled transaction, by no sheer logic a comparable controlled transaction can be employed for the purposes of making comparison. There is no warrant for diluting the prescription given by the statute or rules when 9 178/M/11; I.T.A./4030/Mum/2014; I.T.A./584/Mum/2011 & I.T.A./4235/Mum/2014— M/s. Barclays Bank PLC. AY-06-07 & 07-08 such prescription itself serves the ends of justice properly and is infallible. If the view of the Revenue that a controlled transaction should not be shunted out for the purposes of benchmarking is accepted, then all the relevant provisions contained in Chapter X in this regard, will become otiose. If such a contention oj making comparison with a comparable controlled transaction is taken to its logical conclusion, then there will never arise any need to take up any case for transfer pricing scrutiny. The reason is obvious. ALP is determined for application in respect of transactions between two AEs so that the profit likely to arise from such transactions is not under-reported vis-a-vis from similar transactions with third parties. If the comparison is made again with net profit margin realized from transactions between two AEs, instead of third parties, it may demonstrate the same cooked results in both the situations, thereby leaving no scope for any adjustment. In this eventuality, the very object of such provisions will be frustrated. Thus it follows that the ALP can be determined only by making comparison with a comparable uncontrolled transaction and not a comparable controlled transaction." We are of the opinion that the FAA had rightly held that the TPO was not justified in considering JP Morgan Chase Bank and Bank of America, NA having similar arrangements with their AEs as appropriate comparables for the aforesaid transaction.

5.5.We also find that the method applied by the TPO is not PSM as defined under the Rules.Rule 10B of the Rules stipulates that the for the purpose of applying PSM the Net Profit derived by the AE from the international transactions is to be considered. However, the TPO has made the adjustment by taking 60% of Day 1 INPV, which is a hypothetical value representing the gross surplus cash.In the matter of Johnson & Johnson Ltd. (247 Taxman 136) the Hon’ble Bombay High Court has held that the TPO is obliged under the law to determine the ALP by following any one of the prescribed methods of determining the ALP as detailed in Section 92C(1) of the Act,that the determination of the ALP has to be done only by following one of the method prescribed under the Act.We are also agreeable to the argument submitted by the assessee that the PSM can never be applied for benchmarking marketing support service functions. As per Rule 10B(d),PSM is applicable "mainly in IT.s involving transfer of unique intangibles or in multiple IT.s which are so inter-related that they cannot be evaluated separately for the purpose of determining the ALP of any one transaction. 5.6.We are not inclined to refer the matter to the file of the TPO.We would like to refer to the case of Kodak India(P)Ltd.(155TTJ697)wherein the Tribunal has held as under: “69.We also cannot agree with the DR that the issue be restored to the TPO because the methods, as prescribed by the legislature are mandatory, not directory. When mandatory provision is either superseded or ignored, it straightway affects the jurisdiction. In the instant case, we have to mention that it was a case of suo moto reference to the TPO and it is the case of the revenue authorities, to import the provisions of Chapter X. In this circumstance, since the ATPO ddid not adhere to the prescribed methods consciously, another innings to rectify the mistake cannot be allowed, as the TPO infringed the relevant provision of the Income tax act and Rules.”

178/M/11; I.T.A./4030/Mum/2014; I.T.A./584/Mum/2011 & I.T.A./4235/Mum/2014— M/s. Barclays Bank PLC. AY-06-07 & 07-08 In the case of Havells India Ltd.(140 TTJ283)the Tribunal has dealt with the issue of restoring the matter to the file of the TPO and has held as under: 29.Apropos the ld.DR’s contention asking for remitting the matter to the Assessing Officer, it must be noted here that such a course is neiher required, nor appropriate to be adopted. As an appellate authority, the Tribunal has to see whether the assessment framed has been framed in accordance with law and if there is sufficient material to support it. If that is so, it is not for the Tribunal to start investigation suo moto and to thereby fill up the lacunae if there is material to support the assessment, the assessment, as confirmed or upheld by the CIT(A) needs to be sustained by the Tribunal If not, the assessment falls. It is for the department to gather material and make proper assessment and the Tribunal is not in that manner, an income-tax authority. The income-tax Act does not envisage the ITAT as an income-tax authority, rather in the scheme of the Act, it is a purely appellate authority. That being so, as observed in Raj KumarJain v. Asstt. CIT [1994] 501TD I (All.)(TM), the object of the appeal before the Tribunal is whether the addition or disallowance sustained was in accordance with law. If there is sufficient material, the addition must be upheld. If not, the addition must be deleted. No further enquiry can be ordered by the Tribunal with a view to fill in the lacunae and sustain the addition/disallowance. Doing so would amount to taking sides with the parties, which is not the function of a judicial authority like the Tribunal. It is only that if there is any error in the proceedings or the procedure, the appellate authority could correct it. Making further investigation, however, is not apart of the procedure, but is substantive and is beyond the purview of the Tribunal " Considering the above discussion and the peculiar facts and circumstances of the case,we are of the opinion that the order of the FAA does not suffer from any legal or factual infirmity.So, confirming the same,we decide the effective ground of appeal against the AO. ITA/4030/Mum/2014,AY. 2007-08: 6.The only effective ground of appeal is about agency fee and interest income from the ECB transactions.Following our order for the earlier year,we partly allow the ground raised by the assessee. ITA/4235/Mum/2014, AY.2007-08: 7.The appeal filed by the AO is dismissed as the issue involved in the year is identical to the issue dealt by us last year i.e. ALP of derivative transactions. As a result, appeals of the assessee stand partly allowed and the appeals of the AO are dismissed. फलतः िनधा"रती अपील" अंशतः मंजूर क" जाती ह" िनधा"रती अिधकारी क" अपील" नामंजूर क" जाती ह" Order pronounced in the open court on 12th January,2018. आदेश क" घोषणा खुले "यायालय म" "दनांक 12 जनवरी, 2018 को क" गई । (अमरजीत "सह / Amarjit Singh ) (राजे"" / Rajendra) "याियक सद"य / JUDICIAL MEMBER लेखा लेखा सद"य सद"य / ACCOUNTANT MEMBER लेखा लेखा सद"य सद"य मुंबई Mumbai; "दनांक/Dated : 12 .01.2018. Jv.Sr.PS.